Financial Analysis of Stay-a-Night Digital Concierge

Financial Report for Stay-a-Night Digital Concierge

Executive summary

Stay-a-Night Motel has identified a golden opportunity to increase customer experience and quality of service without increasing costs. The motel wishes to leverage on modern technologies that can supplement personal services provided by staff. In line with this, Amazon Echo, a new digital concierge has been identified as key device that will enable the motel leverage on modern technology in provision of services to customers. This project will require installation of Echo devices as well as associated hardware and software requirements. The echo devices will be replaced after every three years during which each of the devices can be disposed at $25. At the end of the three years, the devices will be replaced to last another 3 years. The initial phase of the projected is expected to cost the motel about four million dollars, including the upfront costs and the installation costs. The second phase of the project will cost about 4.4 million dollars in total. The expected rate of return is 24%, which is above the motel’s minimal attractive rate of return of 10%. The project will be able to give positive returns within its first phase. This report recommends Stay-a-Night Motel to invest in the digital devices since there is potential for positive marginal gains from investing in the project.

Financial Analysis of Stay-a-Night Digital Concierge

The application of modern technologies in the hospitality industry has been identified as a major cost cutter through promotion of self service delivery. Leveraging on digital assistance is also key to improving customer experience and satisfaction. The Stay-a-Night Motel has identified the need to acquire a digital concierge dubbed ‘Amazon Echo’ that will act as a personal assistant to guests. Since the motel targets middle-income guests, the new technology should assist in maintaining low operating costs while improving customer experience and quality of service delivered. Amazon Echo can improve customer experience by enabling guests access a variety of services such as transportation arrangements, food delivery, television channel selection, making reservations, and other services commonly required by guests.

Amazon Echo can also provide other services to guests such as self-registration into the motel which will greatly reduce the time taken to check in and out of the motel. This can be made possible by the use of a voice recognition technology that identifies repeat customers based on their voices. Such a device can significantly improve customer experience in the motel. Self-service technology has significantly improved the quality of services not only in the hospitality industry but also in other sectors such as airline bookings, train tickets, concert tickets, and among others. In fact majority of businesses have adopted one or more forms of self-service technology, with great benefits compared to the costs of acquiring the technology. In the banking sector, the use of ATMs and most recently the introduction of mobile money platforms that enables consumers to access their bank accounts on their phone has greatly improved customer experience and reduced long ques in the banking halls. These technologies have been critical in cost reduction efforts in the different areas they are applied.

Stay-a-Night Motel has established its presence in 100 locations, and each having an average of 70 rooms. Therefore, the chain has a total of about 7,000 rooms. The average occupancy rate at any given day is 70% meaning that of the total 7,000 rooms, only an average of 4,900 rooms are occupied at any given day. This translates to an occupancy rate of 49 rooms for each motel. The cost of rent for a room per night is $100. Thus each motel earns a gross revenue of $4,900 before tax. In total, the chain earns gross incomes of about $490,000 per day before tax. The cost incurred by the motel for a room is 55% of the revenue. Each motel thus incurs costs of about $2,695 per day bringing the net revenue down to $2,205 per day. The net revenue earned by the chain per day is $220,500 before tax. The tax rate is 25% and the capital gains rate at 20%. Adjusting for these items will slightly impact the net profit figures.

The introduction of Amazon Echo as a digital concierge is projected to increase the motel occupancy rate by 3%. This will have significant impacts on the net revenue of the motel. In addition, the cost implications of installing maintaining the digital concierge will have a strong impact on the profits of the motel. There is need to establish whether the costs outweigh the benefits especially with regard to the long-run. A 3% increase in occupancy rate will increase the room occupancy rate to 5,110 for the entire motel chain and an average of 51 rooms per each motel. Gross profit for the entire motel chain will increase from $490,000 per day to $511,000 per day which reflects a 4.3 percent increase.

Stay-a-Night Motel expects a high price discount from purchase of Amazon Echo due to the fact that it will acquire the devices in large scale to serve all of its motel chains. The motel expects that installation of the digital concierge will open up marketing opportunities for Amazon since guests will likely develop interest to purchase the devices for their personal use once they enjoy the experience. The motel projects that the wholesale price of the devices will cost $90 each, which is half the marked price of each digital device. Each motel will require 80 devices for full functionality, one for each room plus 10 more to placed inn strategic locations in the motel. The total costs of the Amazon Echo device for each motel is thus $7,200. The cost for the entire chain will thus be $720,000.

The Echo hardware will need replacement every three years. The salvage value of each Echo device is projected to be $25. This means that the salvage value for a single motel will amount to $2000. Additional costs of $1,000,000 will be incurred due to the need for staff training, hardware tweaking, software enhancement, and integration of the digital connections with local events and businesses. Installation costs of $40 apply for each unit. Maintenance costs will average $225,000 monthly. This will be handled by a corporate staff who will be in charge of the system in all motel chains.

The management expects that the benefits of this program far outweighs the costs. One of the major benefits that the program will deliver is improved customer service and experience at all motel chains. Customers will be able to request for room service with ease, make transport arrangements and obtain information about local events. Comparing the service to be delivered by the devices with interpersonal service given by staff, there are relative advantages which constitute speed in delivery, location flexibility, time saving, and a higher sense of control. The management expects that the devices will help reduce the need for more staff since the current staff will able to serve guests quickly and in an easy manner. This will also reduce costs for the motel chain. The installation of these devices will mark a major step towards acquisition and application of modern technologies in the motel chain.

On the other hand, there are a number of disadvantages to using the self-service technology. The motel chain is in a service oriented industry. This means that people value the chain by the quality of service they receive from the staff. Customers expect to be personally attended to or served by the staff. The introduction of the devices will lower interaction between customers and the motel staff. This may lead to lower customer satisfaction especially when majority of services are provided by machines. Second, the devices have certain inherent limitations relating to their performance. For instance, even though customers can be able to make meal requests, they may not be able make special requests such as extra ingredients or need for an additional facility such as a wheelchair. Lastly, personal service remains critical in this industry and is part of customer satisfaction (Coote & Rudd, 2007).

Financial Analysis

The first part of the financial analysis shows the income statement derived from the projected revenues. The income statement shows projected revenues before and after the implementation of the digital devices. These revenues are based on the assumptions made by the management regarding installation of the Echo devices. The averages used regarding room occupancy are based on figures given by the motel management.

 

   Base year Year 1-3 Year 4-6
Revenue 178,850,000 615,536,000 689,449,500
Cost of goods sold (98,367,500) (338,544,800) (384,697,225)
Gross margin 80,482,500 276,991,200 304,752,275
Salary   (8,100,000) (8,100,000)
Depreciation expense   (3,428,650) (3,759,400)
Earnings before interest and tax 80,482,500 265,462550 292,892,875
Tax expense (36,217,125) (66,365,641) (81,552152)
Net income 44,265,375 199,096,909 211,340723
Profit margin on sales 31% 32% 31%

 

The income statement indicates that the motel may earn higher profits when the Echo devices are installed. This is because the devices will increase the occupancy rate of the hotel. Net income in years 1-3 is expected to be $199,096,909 compared to projected net income per annual of $44,265,375 before installation of the devices. Gross profit is projected to increase slightly from $276,991,200 in years 1-3 to $304,752,275 after the introduction of the digital assistant devices. Generally, income will increase slightly after the installation of the digital assistant devices. The projected profit margin on sales is 32 percent inn years 1-3 after the installation of the digital assistant devices. This

The next section contains a cash flow analysis for the motel. A cash flow analysis will help in examining the actual cash flow situation in the motel.

Stay-a-Night Motel Cash Flow Analysis

  Year 0 Year 1-3 Year 4-6
Net income 44,265,375 199,096,909 211,340,723
Depreciation (Add back) 0 3,428,650 3,759,400
Investment   (4,006,900) (4,416,400)
Salvage value   578,250 657,000
Capital gains tax   (231,300) (131,400)
Free cash flow   198,865,609 211,209,323

 

From the above cash flow analysis, it is clear that investing in the digital assistant devices will not cause a cash flow problem in the motel. This is because the motel will still have a positive cash flow balance that it can use to run daily operations. After the installation of the new devices, the motel will still have a positive cash flow balance of $198,865,609 in year 1-3 which it can use to carry out daily operations. The assumption is that costs and revenues will remain relatively the same over the entire period. The cash flow analysis in years 4-6 also gives a positive cash flow balance. This indicates that investing in the digital assistant devices will not cause any cash flow problems to the motel.

Internal rate of return analysis

Stay-a-Night Motel employs a minimum acceptable rate of return (MARR) of 15%. This means that projects can only be accepted if the returns are higher than this rate. The following table gives the minimum rate of return of the digital assistant project as well as the net present values of the returns for a period of 6 years. From the excel worksheet, the internal rate of return is positive. The rate of return for year 1-3 is 23% while that of year 4-6 is 25%. The internal rate of return for the project is above the minimum acceptable rate of return for the motel which has been established as 15%. The average rate of return for the project in the whole duration stands at 24%. As such, the project is worth undertaking since it will yield more returns. The net present value of the project from the worksheet is $333,764. The cash flow obtained from the project will thus exceed the amount of capital that the motel has invested in the project. The project is thus worth undertaking.

The project may bring additional profitability opportunities. The motel will be able to provide local information to guests through various applications installed on the digital concierge devices. The motel can take this opportunity to advertise local events for a small fee to guests and customers. Local businesses can advertise their events or products for a small fee enabling the motel to make some money from that. Additionally, guests will be able to use the digital concierge devices in future to make their motel bookings or other bookings such as airline bookings.

Conclusion

This financial analysis recommends that Stay-a-Night Motel invest in the digital concierge devices. Adoption of this technology will enhance guest experience and improve quality of service at a small cost to the motel. The financial projections indicate that the project may bring an internal rate of return of about 24% which is way above the motel’s minimal attractive rate of return. The net present value also indicates that cash flow projections related to the project will exceed the capital invested. The risk of investing in this project lies in the possibility of reduced customer satisfaction due to loss of personal touch with hotel staff. The management recognizes that the motel industry is service oriented and customers value the motel based on the quality of services provided by staff. As such, the motel does not intend to lay out staff or substitute their role with the digital concierge. The devices will only be meant to supplement the efforts of staff in delivering quality service to guests.

References

Coote, B. A., & Rudd, J. M. (2007). Determining consumer satisfaction and commitment through self-service technology and personal service usage. Journal of Marketing          Management, 22(7), 853-882.

Appendix

Internal Rate of Return
-4416400
2177201
2271820
2366058
25%
-4006900
1896607
1990846
2085454
23%
Net Present Value
24
-8423300
1896607
1990846
2085454
2177201
2271820
2366058
($333,764.44)
 

 

Appendix 2

Stay-a.Night Projected Income Statement for year 1 to year 6

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Locations 100 105 110 115 120 125 130
Rooms 7000 7350 7700 8050 8400 8750 9100
Occupancy 4900 5145 5390 5635 5880 6125 6370
New Occupancy 4900 5366 5621 5877 6132 6388 6643
Income Statement
Total revenue 186515000 195859000 205166500 214510500 223818000 233162000 242469500
Cost of goods sold 102583250 107722450 112841575 117980775 123099900 128239100 133358225
Gross margin 83931750 88136550 92324925 96529725 100718100 104922900 10911275
Salary 2700000 2700000 2700000 2700000 2700000 2700000
Depreciation 1142883 1142883 1142883 1253133 1253133 1253133
Earnings before interest and tax 84293677 88482045 92686842 96764497 124285967 105158142
Tax 21073419 22120511 23171711 24191124 31071492 26289536
Net income 63220258 66361534 69515131 72573373 75727325 78868606

 

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